Sales of bonds backed by riskier US corporate loans have surged to Essay

Sales of bonds backed by riskier US corporate loans have surged to their highest level in seven years, helping to fuel a leveraged lending boom that is concerning regulators - Essay Example Furthermore, the low-interest-rate environment, more credit spreads, and promising laws have bolstered many performance metrics to better than pre-crisis levels. It is predicted that the asset class will experience growths stemming from the attractive returns offered by the CLOs in comparison to similar collaterals. A collateralized loan obligation can be argued to be the entire structured financial transactions where several degrees of equity and debt are delivered via special service vehicles that are primarily composed of commercial loans. Specifically, a distinction exists between a Collateralized loan obligation and bond obligations or mortgage obligations in that CLO in that they are debt securities that are collateralized by commercial loans. The Collateralized Loan Obligations work on a purchase basis. Typically, the degree and extent of the investment in the Collateralized Loan Obligations depends on the risk tolerance level of the investor, such that, risk tolerant investors receive more returns on their investment relative to risk averse investors. Comparatively, a case of a default on loans leads to the risk averse investors reaping the most (Westerfeld, & Weber, 2010, p. 75) Throughout the third quarter of 2008, the market experienced one of the worst financial crisis ever experienced in the twenty-first century. The crisis was characterized by the failure of major business and reduction in consumer wealth by huge margins (Westerfeld, & Weber, 2010, p. 70). Nevertheless, experts argue that the bursting of the housing bubble in 2006 led to the plummeting of the pricing in the real estate business, an issue that damaged most financial institutions. Key among the players in the causes was the Collateralized Loan Obligations that acted a substantial part in the sub-prime of the housing boom. With the continued growth of the CLO throughout 2005, more focus shifted to the use of subprime mortgages as collateral against